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Daily Newsletter, Thursday, 3/28/2013

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Q1 End Brings New Highs

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Today, the last day of Q1 2013, opened with mixed markets. At least overseas. Fears stemming from the ongoing European financial crisis and new signs of policy changes in China helped to depress Asian stocks. The fear was seemingly misplaced as the expected run on European banks did not unfold and European markets drifted higher. Cyprus was able to open its banks today in what was described as an “orderly” fashion and helped to reduce fears of contagion. The potential run on Cypriot banks was curbed by tight monetary controls that limit the amount and frequency of cash withdrawals and credit spending. These controls are expected to remain in place for at least a week and could lead to more fear based selling when they are relaxed.


European shares did not participate in the declines witnessed in Asia. Mixed economic data, the unfolding Italian hooplah and the Cyprus bank ordeal were met with optimism. The major European indexes closed the day solidly in the green with +0.5% gains across the board. The mixed response from the major world markets seemed to be carried over into our own opening. The U.S. markets barely paused before moving up and above the all time closing high. The S&P, DOW and NASDAQ futures began the day in positive territory ahead of our own economic data but then fell just before the open. In the end it was the European market that pointed the direction our own would take.

A lot of factors contributed to today's price action. The end of the week, the end of the month and the end of the quarter were only a few. International concerns are growing in importance and have raised concern over the continuation of our own recovery. Trading this morning was choppy with the S&P moving within less than a half point of the all time closing high within the first few minutes of trading. After breaching the all time zone the index quickly fell back into negative territory before moving up again later in the day. The final hour of trading saw the index at all time high levels and those levels held into the close. The S&P finished the first quarter with more than a 10% gain.

SPX Hourly

The International Scene

Asian shares tanked overnight ahead of the European open and the end of the quarter. Fear of Cyprus and EU banking fall-out and the uncertainty of the EU's future were among the biggest movers. Adding to this were renewed fear of changing Chinese financial policy. New controls on wealth management were put into place in an effort to reduce systemic risk. This move put a real hurting on Chinese banks that spilled over into other Asian markets. The Nikkei was the biggest decliner losing more than 1%. The European instability helped to depress the Japanese markets on fear it would further hurt Japanese exporters.

At this time the Nikkei and the yen are both heavily impacted by expectations, expectations of aggressive fiscal policy. Now that the plans of Abe are closer to fruition the Japanese market can perhaps resume the previous trends. The Nikkei and the yen have both taken a breather awaiting the next BOJ meeting with its new governor. Haruhiko Kuroda, the new BOJ Governor, is expected to enact open-ended asset purchases and other policies aimed at devaluing the yen and boosting Japanese GDP. Anything short of this expectation could negatively impact Japanese stocks and the USD/JPY trade. The USD/JPY has been consolidating ever since Kuroda's nomination was made official and is now sitting on the short term moving average and just below the resistance at 94.50. On the daily charts MACD and stochastic both suggest that there is support around 94(lets not forget that 94 was Abe's original target for the yen). Longer term these indicators suggest that the bull trend in the USD/JPY is not yet over. Even with these indicators there is risk of further downside ahead of the BOJ meeting with next support at 92.50.

USD/JPY daily

Europe moved past the Cyprus bank fears, declining Asian markets and mixed economic data with ease. Eyes here were more on us and what U.S. data and markets were doing. There was some important data from the region worth mention. German retail sales rose unexpectedly, nearly an entire percentage point above expectation. This gain was offset by increases in unemployment and a decline in the retail sector PMI. These mixed signals are casting some doubts on German recovery efforts. The German economy is expected to rebound sharply this quarter and lead the EU recovery later this year. So far signs are good for that rebound but there is some evidence it may not be as sharp as expected. Issues in Italy and Cyprus, while both are probably short lived, have helped to expose cracks in the German and EU recovery efforts. Confidence in the region is in decline as evidenced by the drop in the euro versus the dollar over the last two months. Last week the EUR/USD pair made a decisive drop from the 1.3000 level and has now dropped below an important technical level. A Fibonacci Retracement of the rally started last July puts the Monday drop in this pair below the 50% line.

EUR/USD daily

The Economic Data

Today's data was a mixed bag. The final Q4 GDP figure was released to little effect and new unemployment claims numbers showed no real sign of change. The expectation was for final Q4 GDP growth of 0.5%. This is well above the previous estimates of 0.1% growth and a tenth above the actual report of 0.4%. The actual was a little below expectations but I don't think that will matter very much in the long run. This figure is looking back three months to a time we knew was slowish, plus the estimates I have seen range from 0.3-0.5%. What this does though is set us up for a possible pull-back in first quarter GDP. Now that the 4th quarter is at a five year high there is a real possibility for the first quarter to be “not as good”.


Unemployment claims rose unexpectedly but should be taken with a grain of salt. The data was released with a caution that it includes newly revised benchmarks for seasonal adjustments. Initial claims jumped 16,000 from an upwardly revised 341,000 to 357,000. The four week average was also revised up for the previous week and gained in this week's data. This week the average was 343,000, of the five year low but still very low in the range. The revisions and new seasonal adjustments put the initial claims figures back above 350,000, near the middle of the 12 month range. We'll have to keep a close eye on this, if it continues to gain in the next few weeks it could signal a bottom in employment gains. However, with the revisions to seasonal adjustments this weeks spike (minor) could just be one-time affair. Even with the adjustment and this weeks gain the trend in unemployment claims over the last few months is still down.


Continuing claims, reported with a one week lag, dropped this week. The number of Americans filing for a second week of benefits fell by 27,000 to a level just above the 5 year low. Based on this table it looks like hiring is picking up, folks who lose their jobs are finding work a little faster than they were before. This table also makes me think that we could expect to see another drop in total claims, providing hiring keeps up the same pace we have seen over the last few months.


Total claims made a small jump, which could almost be expected by looking at the table. Over the past few months one weeks gains have been offset by the next weeks declines and have resulted in a net loss from the elevated levels we reached at the end of last year. Even with the gain over last week's release total claims is yet again down over the last three weeks and last three months. The downside is that it is still above the 5 million mark.


Next week the first of the month will bring us new employment figures. What I call the “Employment Bundle” begins with ADP and Challenger reports Wednesday. These two reports are the lead in to the U.S. Non-Farm Payrolls on Friday which sandwich the ever present weekly unemployment claims. ADP and NFP numbers are both expected to be above 200K, in line with the past month and a sign of some potential strength in jobs creation. Unemployment is expected to tick up by a tenth but with the extreme low levels of continuing claims and down trending total claims this estimate may be too high. I suspected a small drop could happen last month and was shocked by the actual -.2%. This probably won't happen this month but it could remain flat. It all really depends on the strength of the recovery and hopes for the future. Right now I see housing as a crucial link in the chain, the question is will it keep rebounding and lead jobs creation or not?

Chicago PMI wrapped up the economic data for today. The expected 54 was met by a a mildly disappointing 52.4. While lower than expected and below the previous months 56.8 it is still expansionary. Today's data as a whole is rather mixed but biased toward growth. Job growth is not increasing as fast as some might like but it is growing. Manufacturing and industry are about the same. If the leading indicators are to be believed this trend of subdued expansion may be masking real improvement in the economy. Next week look out for the ADP employment and NFP figures, new car/truck sales, factory orders and ISM services gauge. Tomorrow be aware that personal income and spending, PCE core and Michigan Sentiment are scheduled for release.

The Oil And Gold Indexes

Oil traded flat today after a choppy session to end above the potential support of $96 a barrel. This is the fifth day of gains for oil and comes on the relief of Cyprus(?) and possible strength here at home. The Oil Index has not been able to match the recent two week bull market in oil but has been able to regain the positive side of 1350. This support/resistance line has been giving the index a hard time and may prove to be too much. The move up in oil is bullish for the economy in my opinion but the economy has to actually improve for the higher prices to be sustainable. Without sustained higher prices oil industry profits will not grow and may even contract. As long as the economic outlook remains hopeful oil prices should trend higher. China and Europe pose a threat to global economic recovery at this time. China has a potential credit/housing bubble and Europe has its ongoing financial drama. Either could be a real drag on the world economy and oil prices.

The Oil Index

Gold prices fell back below $1600. This is a sign of potential confidence in the world economy, at least in the near term. The calm nature of the Cyprus bank re-openings and lack of apparent fall-out from the bail out terms have traders leaving the safe-haven. The drop below $1600 is bearish for the metal and could take it back down to retest the recent lows around $1550. The Gold Index traded flat today despite the drop in the underlying metal. The index may have found a bottom at the $145 level but it needs to be tested. This could be indicating a potential bottom in gold is near, perhaps around $1550. The next few weeks will be important for gold. The coming round of monthly employment figures, the next round of ECB and BOJ meetings and the release of 1st quarter GDP estimates will all impact gold prices.

The Gold Index

Story Stocks

Earnings, even when it isn't earnings season earnings are still on the minds of the market. Today saw the release of earnings reports from Blackberry(Research In Motion), Winnebago and Finish Line along with about 3 dozen others. Blackberry was a nice surprise and may have provided a nice entry point to BBRY bears. The company reported adjusted earnings of $0.22 per share versus an expected loss of -$0.29 per share. This came on a drop of over 3 million subscribers. The statement said that sales of Blackberry 10 were strong and were offsetting losses in other areas. They expect the launch of new products later this year to provide renewed growth for Blackberry and the stock jumped in premarket trading. Looking at the charts I decided to put up a Fibonacci retracement and found that the stock is bouncing between Fibonacci levels and appears to be winding up. This stock could make a big move over the next couple of weeks to a few months, direction depending on break out.

Blackberry

Winnebago failed inspire a new round of investors. Today's report showed improving sales, improving earnings and improved demand. Earnings came in exactly as expected at $0.22 and the future outlook is good. One company executive was quoted as saying that they “believe RV sales will continue to grow to pre recession levels”. Despite this shares of Winnebago completed a short term double top by falling below the base line with a strong black candle and high volume.

Winnebago

FinishLine performed in the exact opposite fashion as Winnebago. This stock has been trending down to sideways all year. Today's release and future guidance helped push the stock back above the $19 level. This move could have legs but faces tough resistance at $20, $21 and $22.

Finish Line

In a follow up to an earnings report from last week Oracle corporation continues to trade lower. Costs associated with a growing sales force were blamed on a marginal earnings miss. The company mentioned no impact from global conditions or other adverse factors. Its largest competitor, Linux software developer RedHat, announced earnings last night. RedHat followed Oracle's lead over the past week and traded to the downside but the move merely served to offer a buying opportunity for the bulls. RedHat beat expectations with EPS of $0.33 versus the consensus of $0.21. Revenues were down slightly but margins are up and expectations are at least OK. Shares of RHT opened more than $2.50 lower than yesterday's closing price but quickly found support. The stock ended the day up with a nice long white candle and high volume.

Oracle

Redhat

The S&P 500

Well, the S&P 500 reached a new all time closing high. I have been waiting, watching and predicting this for so long now it is almost anti-climatic. It was just a year ago the S&P was bumping up against the 1420 level in its last attempts before slipping back to retest 1300. That was over 270 points and numerous economic reports ago. In that time the index has crawled the proverbial wall of worry. Languishing jobs, sluggish housing recovery, an economic dip in China and the saga that is the European financial crisis all played their parts in the climb to this level.

In the last year employment has declined by nearly a full percentage point and jobs creation has nearly doubled. Other points of improvement, at least as far as the Thursday market wrap are concerned, are improvements in continuing and total jobless claims. Continuing claims has dropped by over a half million and total claims by over a million on a week to week basis. The only thing that has not really improved is the initial claims figures. All in all the economy is much improved from the year ago period but is that improvement enough to keep the market at this level. Perhaps even more important to ask is if the expectation for continued improvement is enough to keep the market moving forward.

The S&P looks like it wants to go higher. The index is in a clear uptrend and the momentum indicators I like to use are suggesting an early buy signal may be forming, almost. The problem today is that even though a signal is almost there it isn't quite. The bearish MACD peak is minimal but it is still bearish and divergences in the indicator suggest the strength of the uptrend is waning. As for stochastic, the %K crossed the %D from beneath during an uptrend which is usually a buy signal. What makes it unreliable to me is the position of the %D, flat. This cross can often be the signal that a signal is coming but not really a signal itself.. A much better signal here would be a second cross from below with the %D line pointing up. This might happen if the index breaks up through the resistance into truly new higher ground. I have my line drawn much closer to the top of the intra-day range around 1572.30 where I think true resistance is. With MACD and stochastic positioned the way they are I think a pullback is more likely than a break through, at least until after the data next week. It is completely possible that if the market does go up it will crash headlong into resistance when we get that next round of data.

SPX daily

The longer term charts are also at a point when the market could literally go either way. The current momentum and stochastic peaks are both extended in tandem with the market and beginning to roll over. This does not mean a pull back or sell of is coming but it could. It could also be the start of a protracted and lengthy round of buying. Both of these indicators can stay at the upper end of their ranges for several weeks or even months in a strongly trending market. A turning point may be in the offing over the next few weeks and it could have long term implications. Next week its data for us and then the next week we get ECB and BOJ policy meetings, both of which could affect the world recovery. The ECB may ease a little more but there isn't much talk of that. The BOJ will surely ease, just how and how much are the questions.

SPX Weekly

Both MACD and stochastic support the uptrend but they also both support its weakness. The data suggests that there is a lot of underlying strength in the economy just waiting to be grow but there is also a lot of uncertainty in the market. The European financial crisis won't quite go away. Cyprus is only just past, it will likely flare up just like Italy is sure to flare up again as well. Asian markets are harder to read but pose just as much risk. China is facing potential problems with its inflating economy and Japan is trying to inflate its deflated one. There are still chances for the world economy to start firing on all cylinders, its just harder to see today. Wait until next week when the smoke clears and we get all that juicy data. Then we will get a better look at the economy and what to expect in the next quarter.

Until then remember the trend!

Thomas Hughes


New Option Plays

On A High Note

by James Brown

Click here to email James Brown
The U.S. stock market ended the first quarter of 2013 on a high note.

The U.S. market is closed tomorrow.

There will be no new plays tonight.

We will be publishing a normal Option Investor Newsletter this weekend.



In Play Updates and Reviews

Almost Six Years Later

by James Brown

Click here to email James Brown
It has taken the S&P 500 index almost six years to reach and surpass its prior all-time high of 1565. That feat was finally achieved today with a six-point gain to close at 1569.

The U.S. market is closed tomorrow.

There will be no play updates tonight.

We will be publishing a normal Option Investor Newsletter this weekend.